Those factors have caused cash prices to rise higher than would be expected at this time in the year. While Johnson reports specific Central Iowa cash prices, let us say they are 35 cents per bushel higher than normal for corn at this time of year, and 40 cents higher for soybeans than normal at this time of year. What is more is that the basis usually improves after the first of the year as processors work through abundant supplies from harvest.
So, what can be done with this information? Johnson is an advocate of a basis contract in such situations where the basis is unusually tight. With the elevator offering a price that represents the futures price minus the basis, the cash price currently is closer to the futures price than is normally the case. A basis contract can be used to market your grain by taking advantage of the narrow basis, and then sometime later, locking in the futures portion of the price. When that occurs you have a forward contract, theoretically with a higher value due to the narrow basis.
The key to success is watching the futures price and ensuring that the contract agreement is completed before the futures price erodes further. That is one risk of the futures contract. Johnson says, “Such a risk is probably greater for soybeans than corn, as the size of the southern hemisphere strongly impacts the direction for nearby futures prices. Using the strategy for corn bushels tends to be less risky, as the seasonal corn futures prices tend to move higher in the late winter into the late spring months.”
What you also need to know is that when a basis contract is signed, the elevator will want the grain, and you will relinquish title to it. In doing so, you will be paid about 80% of the estimated value of the contract, and will receive the balance when the futures element is locked in.
Currently, the corn and soybean basis around many areas of the Cornbelt is unusually tight because of multiple factors. This situation promotes the use of a basis contract to sell grain, giving the producer an advantage that is atypical in traditional grain marketing. Once the basis portion of the price is locked in, the seller watches the futures price move, and has the obligation to complete the contract at a later point, when the futures price is at an advantage also.
Source: FarmGate blog